PROVISION UNDER THE COMPANIES ACT, 1956

One of the most controversial questions raised and still being ambivalent is:

Whether ROFR agreements, Tag along and Drag along rights are enforceable under law and
in compliance with section 111A of the Companies Act, 1956?

It is pertinent to highlight that this point is no longer Res Integra (untouched), but is covered by
the decision of the Supreme Court in the celebrated case of V.B.Rangaraj v.
V.B.Gopalakrishnan1. In the said case, the Apex Court has held that a restriction which is not
specified in the Articles of Association is not binding either on the Company or on the
shareholders. The court further held that the arrangement (as in the said case) imposed additional
restrictions on the member’s right of transfer of his shares which were not stipulated in the
articles and, therefore, were not binding either on the shareholders or on the company. It was
also held that the shares are movable property and transfer thereof is regulated by the articles of
association of the Company. The Court held that even if the Articles of Association provide for a
ROFR, if the right is a restriction on the free transferability of shares and not a mere process,
then it is not likely to be enforceable.

Later the Judicial view point decided in 2010 in the case of Messer Holdings Limited v. Shyam
Madanmohan Ruia and Ors.2, A Division Bench of the Bombay High Court had ruled in this
case that a private arrangement between shareholders of a public limited company on a voluntary
basis relating to share transfer restrictions (right of first refusal) is not violative of Section 111A
of the Companies Act, 1956. The judgment also goes on to suggest that it is not mandatory for
the Company to be a party to such an agreement relating to share transfer restrictions and it is not
necessary to incorporate share transfer restrictions in the articles of association of the Company.

Shareholders can enter into a consensual agreement in case of shares of public companies, can
also freely negotiate and enter into agreement containing the ROFR or what is commonly known

1
Supra note 4
2
Supra note 7
as Pre-emption/ Tag Along/ Drag Along rights even in the case of listed shares, which was
recently confirmed by the Division bench of A.M. Khanwilkar and A.A. Sayed, JJ. of the
Bombay High Courts. These Share Purchase Agreement (SPA) are usually assent between the
Promoters, PE Investors, Technical or Financial Collaborators.

The decision in the case of Messer Holding provided some relief to shareholders of a public
company however not resolved issues and concerns of corporates and joint venture parties. But
some questions yet to find their stands. Without a company being a party to the agreement
between the shareholders, its terms cannot be inserted in to Articles and even in case it is
incorporated in the Articles, the validity of restriction on share transfer in a public company
would not be sustained and uphold looking the decisions delivered so far. In such circumstances,
since shareholders agreement is not biding to a Company, a shareholder cannot restrict the
company from transferring shares which is in violation of the agreement. Unless and until the
role of the company and such restrictions validly find the place in Articles, Company Law Board
would not have jurisdiction for civil breach. Therefore remedy available for aggrieved
shareholder is to approach civil court, which is costly and lengthy and many times parties
reluctant to prefer it in joint venture business 3. An in-depth analysis of the aforementioned case
is required as it is the most recent decision on the point in issue.

ANALYSIS

(a) This division bench has gone into the intent of 111A. The division bench has rightly held now
that when shares are freely transferable doesn’t mean that the shareholders lose the right to
dispose off or deal with the shares in the manner in which they like.

(b) The Bench has explained the intent that the section 111A was never incorporated to take
away the rights of the shareholders to dispose, which is one of the rights enjoyed by any owner
of any movable property. ROFR and other such agreements are important exit provisions for any
financial or strategic investor.

3
Satyajit Gupta, A twist in the tale: Share transfer restrictions in a public limited company legal?, Available at:
http://indiacorplaw.blogspot.in/2010/09/twist-in-tale-share-transfer.html
(c) This may not be the last word because this controversy may knock the doors of the Supreme
court, but certainly it’s a division bench judgment and is the only judgment in the case of a
public companies of 111 (A) therefore in that sense it certainly it sets aside the controversy
which was raised right from the beginning of Rangarajan from 1992.

PROVISION UNDER THE COMPANIES ACT, 2013

No judgments have been cited here, as it has been months from now, when the act came into
force. This does not means we should forget old Companies Act, 1956 which will be applicable
for some time and we have to come back for to it in practice; for forensic or other historic
purpose.

Given Under Section 56 of the newly drafted act of 2013, which requires A company to register
a transfer of securities or interest of members only when such a proper instrument of transfer;
duly stamped, dated and executed by or on behalf of the transferor and transferee and specifying
the name, address and occupation has been delivered to the company by either party within a
period of sixty days from date of execution, along with the certificate of security or the letter of
allotment of securities. Free transferability of share is one essential condition for Company form
of business, subject to some restrictions under private companies. New Act, deals with
substantially.4

Section 56 of the new Act also talks about the consequences, if the instrument of transfer which
has to be stamped and signed gets lost or not delivered to the place in that case, the company
may register the transfer on an indemnity bond.

On receipt of intimation, a company has power to register transmission of any right to securities
by operation of law from any person to whom such right has been transmitted. Where an
application is made by transferor alone and relates to partly paid shares, the transfer shall be

4
Transfer and Transmission of Securities (Companies Act, 2013), Available at:
http://aishmghrana.me/2013/10/01/transfer-and-transmission-of-securities-companies-act-2013/
registered by the company only after giving notice of the application to the transferee, and
transferee gives no objection to the transfer within two weeks from the receipt of notice.5

The transfer of any security or other interest of a deceased person in a company made by his
legal representative shall be valid as if he had been the holder at the time of the execution of the
instrument of transfer.

Penal provision (Section 447)

Where any default is made under this section, the company shall be punishable with fine which
shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and
every officer of the company who is in default shall be punishable with fine which shall not be
less than ten thousand rupees but which may extend to one lakh rupees liable under section 447
of the Act.

Punishment for personation of shareholder (Section 57)

If any person deceitfully personates as an owner of any security or interest in a company, or of

any share warrant or coupon issued in pursuance of this Act, and thereby obtains or attempts to
obtain any such security or interest or any such share warrant or coupon, or receives or attempts
to receive any money due to any such owner, he shall be punishable with imprisonment for a
term which shall not be less than one year but which may extend to three years and with fine
which shall not be less than one lakh rupees but which may extend to five lakh rupees.

5
S. Muralidharan, When shareholder’s Agreement is enforceable?, November 1, 2010, Available at:
http://www.thehindubusiness line.com/2006/08/03/stories/2006080300251100.htm